Direct taxation of businessesi CITDetermination of taxable profit
The taxable profit is the company's gross income for the tax period, less certain deductions. Its determination comes from the annual financial statements prepared under Spanish generally accepted accounting principles (SGAAP), as adjusted under certain statutory tax provisions.
The tax authorities are legally authorised to modify accounting results in order to determine tax results if they consider that the accounting results have not been calculated according to the SGAAP.
All necessary expenses and costs connected to producing income may be deducted from gross income to arrive at a taxable income determination. Additionally, the Spanish CIT Law provides for certain items that are never deductible (permanent differences) or are deductible in a different year (timing differences).
The standard tax rate is 25 per cent, although different rates may apply depending on activity and legal form (e.g., 30 per cent for banks).
Regarding costs, although all expenses incurred by the company will depress accounting profit, not all such expenses will be allowed for tax purposes. To be deductible, an expense must be correlated with the company's income. However, some expenses are considered non-deductible by the CIT Law: penalties, gifts, gambling losses, losses from intra-group sales, financial expenses with the group for intra-group acquisitions.Capital gains and income
Capital gains are normally considered as ordinary income taxable at the standard CIT rate (generally 25 per cent) in the tax period they arise.
As explained below, participation exemption applies to capital gains arising on the transfer of shares when at least 5 per cent participation (or a participation value of over €20 million) is held for an interrupted period of at least one year, the transferred entity is an operating entity and certain other requirements are met.Losses
Tax losses may be carried forward indefinitely, although any deduction is limited to 70 per cent of the positive taxable income before the application of the tax benefit for the capitalisation reserve and other specific items. Tax losses of at least €1 million can always be offset without limitation.
There are additional limitations for large companies and tax groups. When their turnover in the previous 12 months to the taxable period commencement reaches:
- €20 million: tax losses offsetting cannot exceed 50 per cent of the yearly taxable income before capitalisation reserve and tax losses are offset; and
- €60 million: tax losses offsetting cannot exceed 25 per cent of the yearly taxable income before capitalisation reserve and tax losses are offset.
The CIT Law provides anti-avoidance rules to prevent tax losses being utilised when there is a change in the control.Rates
The standard CIT tax rate is 25 per cent and it applies to most companies, although there are other specific rates:
- special tax rates apply to certain activities such as banking, mining, oil and gas that are subject to a 30 per cent tax rate;
- non-profit entities are subject to a 10 per cent tax rate; and
- investment funds and UCITs are taxed at 1 per cent.
Apart from that, there is a special 15 per cent rate for newly created companies, applicable to the first tax period in which profit is obtained and the following period.Administration
The tax year for CIT purposes matches with the accounting financial period, which may be other than a calendar year, but cannot exceed 12 months.
Corporate taxpayers must file tax returns within 25 days after six months following the end of the tax year.
Companies must make three advance payments on account of CIT during the first 20 days of April, October and December, calculated as follows depending on the turnover of the previous 12 months to the start of the taxable period and on the applicable tax rate (all below rates only apply to those companies subject to the 25 per cent CIT rate):
- companies with a turnover under €6 million must pay 18 per cent of the gross tax due liability of preceding tax year generally;
- companies with a turnover over €6 million and under €10 million must pay 17 per cent of the taxable income for the year to date; and
- companies with a turnover over €10 million will make an advance payment resulting from the higher of the following amounts:
- 24 per cent of the taxable income for the year to date, reduced by withholding and current year payments in advance; or
- 23 per cent of the positive accounting profit for the same period reduced by current-year payments made in advance.
The statute of limitations for an assessment is four years as from the end of the voluntary filing period.Tax grouping
The Spanish CIT Law allows Spanish tax resident companies and Spanish permanent establishments (PEs) belonging to a Spanish or multinational group to be taxed as a single group and, therefore, apply a special tax consolidation regime for CIT purposes.
To apply this regime, the main requirements are as follows:
- the Spanish companies should be owned (directly or indirectly) by the same parent company (either resident or non-resident);
- the parent company (either resident or non-resident) of the tax group must hold a direct or indirect minimum holding of 75 per cent (70 per cent for quoted companies) and the majority of voting rights in the Spanish companies belonging to the group;
- the above participation should be maintained during the whole taxable period; and
- the parent company cannot be tax resident in a tax heaven.
The main characteristics of the tax consolidation regime are described below:
- the taxable income results from the sum of all the taxable incomes of each Spanish tax resident company of the tax group, corrected as established in the following points;
- tax losses of any of the companies of the tax group can be offset against any company tax profits;
- tax profits generated from intra-group transactions are deferred and only included in the consolidated taxable income when:
- they are carried out with third parties;
- one of the intra-group companies that is part of the transaction ceases to form part of the group; and
- the consolidation regime is no longer applied;
Taxpayers and the Spanish tax authorities may negotiate APAs on transfer pricing issues. The Tax Agency is quite favourable to the use of APAs since they can provide certainty for both parties, out of the context of a tax audit.
Although legally the length of an APA is not supposed to be longer than six months, its negotiation always takes longer. The APA cannot cover longer than four years, although it can have retroactive effect to years within the statute of limitation.
The documentation provided to the Tax Agency in the course of an APA cannot be used in a tax audit.Alternative dispute resolution
Spanish taxpayers also have access to 'the competent authority procedure' provided in the tax treaties signed by Spain following the OECD Model Tax Treaty and the Arbitration Convention (90/436/ECC Convention of 23 July 1990) concerning the elimination of double taxation that may arise in intra-group transactions within companies residing in EU countries.
Finally, Spain is yet to implement Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union, which should be in force by 30 June 2019.Means of appeal
After a tax audit, taxpayers are entitled to appeal the claim if they do not agree with it. Additionally, taxpayers might obtain suspension of the tax due under the claim, which in most cases would require a guarantee from the taxpayer.
With regard to appeals, a taxpayers have two alternatives: (1) appealing before the same body issuing the tax claim; or (2) appealing to an economic-administrative tax court.
Decisions issued by the Economic Court could be appealed to the Courts of Justice: to the Regional Courts of Justice or the High Court, depending on the amount of the claim.
Afterwards, there might be even another tier of appeal to the Supreme Court, but only when the case may create precedents, so the likelihood of accessing the Supreme Court is very limited.
Lastly, the appeal could reach the Court of Justice of the European Union (CJEU), although the taxpayer cannot directly request its involvement, but only through the Spanish tax court, if the court decides so.ii Other relevant taxesValue added tax (VAT)
Spanish VAT regulation implements the EU directives on VAT.
VAT is levied on the supply of goods and services provided by entrepreneurs and professionals, intra-Community acquisitions and imports of goods into Spain.
The concept of entrepreneurs and professionals includes a large number of assumptions, but basically refers to those persons (physical or legal) who carry out business or professional activities, meaning those that involve the commissioning of material and human factors of production, or one of them, for their own account in order to intervene in the production or distribution of goods or services.
The territory of application of the tax is the peninsula and the Balearic Islands. In the Canary Islands, Ceuta and Melilla other indirect taxes are applied (IGIC and IPSI, respectively). The operation of IGIC is similar to that of VAT with some differences with regard to exemptions. On the other hand, the IPSI is a basic sales tax.
There are three different rates of VAT: 21 per cent (general rate applied to regular deliveries of goods and services); 10 per cent (reduced rate applied to basic needs); and 4 per cent (super-reduced rate applied to basic needs other than those classified in the reduced rate). The ordinary rate of the IGIC is 7 per cent, and the other rates are zero per cent, 3 per cent, 9.5 per cent, 13.5 per cent and 20 per cent.VAT group
When a Spanish parent company owns at least 50 per cent of one or more Spanish subsidiaries (dependent), all of them taxable in Spain, they could opt for the VAT group regime.
Within this special regime there are two forms of taxation: (1) basic level: the result of VAT tax returns of all members is aggregated and, if so, compensated; or (2) advanced level: the group is taxed like a single entity and internal operations do not generate VAT.
Regarding capital goods, their cost must be fully imputed within the period of regularisation of the quotas corresponding to the aforesaid goods.Property transfer tax (TPO)
TPO applies to transfer of goods and rights when the transferor is a private individual. It also applies to real estate transfers and real estate leases when the seller is an entrepreneur but the operation is exempt from VAT.
Transfer of shares is exempt from both VAT and TPO, but when the transfer is aimed at dissimulating the transfer of real estate owned by the company, the actual taxation of transfer of real estate is applied.
TPO tax rates are 6 per cent for the transfer of real estate, as well as for the constitution and transfer of rights in rem over them; 4 per cent in the case of the transfer of movable property and livestock; and 1 per cent in the case of constitution of rights in rem of guarantee, pensions, bonds or loans.
The above rates may change from one region to another, since regional authorities have competence to increase those tax rates.Tax on financial transactions
In October 2018 the government announced a draft of law that would establish a new tax on financial transactions; this tax would apply to acquisition of shares in traded Spanish companies when they have a market capitalisation above €1 billion. The tax amounts to 0.2 per cent of the consideration paid exclusively for the shares and the taxable person is the intermediary acting in the operation.
The above-mentioned draft of law requires parliamentary approval.Tax on certain digital services
Also in October 2018, the government announced another draft of law whereby the 'Google Tax' is enacted. The tax requires parliamentary approval.
This tax applies to companies with worldwide turnover of over €750 million or Spanish income subject to this tax of over €3 million. The tax rate amounts to 3 per cent of income resulting from rendering digital services as defined in the draft of law.Local property tax (IBI)
This tax is a direct municipal tax, periodic, real and mandatory in all councils, which taxes the value of real estate. The rate of taxation will vary depending on the city council, ranging from 0.3 per cent to 1.1 per cent of the cadastral value.Stamp tax (AJD)
Stamp tax (document duties and registration fees) is levied on notarial instruments and records documenting transactions that need to be registered in public registries. The tax rates range from 0.5 per cent to 1.5 per cent of the operation value.Net wealth tax (NWT)
NWT is levied on all assets and rights of economic content held by an individual.